Frequently Asked Questions Monotelo Quarterly Tax Tips White Papers How To Avoid An Audit Do you have a PTN? EAs and CPAs What is your tax background? What records? Fees File electronically What if I get audited? Who will sign my return? When will I receive a copy of my return? How do I find you? Do you have a PTIN (preparer tax identification number)? What is your tax background? What records and other documentation will you need from me? How do you determine your fees? Can I file electronically? What happens if I get audited? Who will sign my return? When will I receive a copy of my return? How do I find you if I have a question or a problem after tax season is over? ​ Do you have a PTIN (preparer tax identification number)? ​ All of our tax preparers and client-facing staff who are involved in the return preparation process have their PTINS. Feel free to ask for the PTIN of any staff member involved in return preparation. ​ What is your tax background? ​ Most of our tax preparers are either CPA's or Enrolled Agents. A Certified Public Accountant (CPA) is certified by the state to act as a public accountant. A CPA is the only licensed qualification in accounting. To be certified, candidates are required to pass an exam. Most states also require an ethics exam or course as well as continuing education credits. A CPA may specialize in tax but not necessarily: there's a wide range of CPA services including accounting, auditing, financial planning, technology consulting and business valuation. ​ An Enrolled Agent (EA) has earned the privilege of representing taxpayers before the Internal Revenue Service by passing a three-part comprehensive IRS exam. The EA status is the highest credential the IRS awards. EA's must adhere to ethical standards and complete 72 hours of continuing education courses every three years. ​ What records and other documentation will you need from me? ​ We will need all your W-2's, 1099's, 1098's and other verification of income and expenses in order to prepare your return. We do not need individual receipts. Please do not send any individual receipts unless we request them. You must retain all your receipts in case of an audit by the IRS. ​ How do you determine your fees? ​ Our fees are completely transparent - you can view our fees on our Fee Schedule . ​ Can I file electronically? ​ Yes, after your return is completed, you will receive E-file consent forms (Form 8879) and be given the option to have us electronically file on your behalf after you review and approve the return. ​ What happens if I get audited? ​ As Enrolled Agents and Certified Public Accountants, we are authorized to represent our clients before the Internal Revenue Service. We can respond to questions and represent you in front of the IRS. ​ If there is an error on your return and it is our fault, we will fix the error, file an amended return on your behalf and you will not be charged for any amended return preparation fees. ​ Who will sign my return? ​ Your tax return will be signed by the person who performs the final review of your return. This person will have a PTIN and the PTIN will appear next to their signature. We can give you the name of the person who will be reviewing and signing your return at the time we receive your tax documents. When will I receive a copy of my return? ​ You will receive a complete copy of your return after we finish preparing the return and the tax preparation fees have been paid. You can choose to receive an electronic copy, a physical copy or both. You will need a copy of your return to review it prior to filing or having us E-file on your behalf. ​ How do I find you if I have a question or a problem after tax season is over? ​ Our offices are open twelve months a year. If you receive a request from the IRS or your state department of revenue, we are available to meet in person, or connect by phone or email. ​ Click Here to check out the IRS website for more resources in choosing a tax preparation firm ​

September 2019 SMALL BUSINESS TIPS Quarterly: Oct 17 How Will Your Real-Estate Sale Be Taxed? When you sell real estate property other than your primary residence, the tax implications of that sale depend on whether it qualifies as dealer or investor property. Each of these classifications is taxed differently and carries its own benefits and drawbacks. ​ Dealer Property: Property you hold for sale to customers in the ordinary course of a trade or business is considered Dealer Property. House flipping is a common example of dealer property because you purchase the property with the intention of fixing it up and selling it for a profit. ​ Profits on dealer sales are taxed at your ordinary income rate which can be as high as 37 percent and are also subject to the self-employment tax of 15.3 percent. Dealer sales cannot be used in 1031 exchanges to defer taxes by reinvesting in another property. ​ One advantage of dealer sales is that any losses on a property are considered ordinary business losses which can be fully deducted in the year of the sale as opposed to capital losses on investment property which are limited to $3,000 per year. ​ Investor Property: Property that is held to produce income or long-term appreciation is considered Investor Property. Rental properties are the most common type of investor properties. ​ Profits on investor sales are taxed at capital gains rates which are capped at 20 percent if you own the property for more than one year. Investor property sales are also not subject to the 15.3 percent self-employment tax. ​ The cost of investor properties can also be depreciated over the useful life of the property, although the depreciated cost will need to be recaptured at the time of the sale. Investor properties qualify for 1031 exchanges which allow you to reinvest the profits from the property into a similar property and defer the taxes on the sale until you sell the new property. One disadvantage of investor property sales is that the deduction for capital losses is capped at $3,000 per year unless you have capital gains from another sale to offset the losses. ​ Generally speaking, if you sell a property at a gain you will receive favorable tax treatment if the property is classified as investor property and if you sell a property at a loss you will receive favorable tax treatment if it is classified as dealer property. ​ Classifying Your Property Sale Identifying the correct property classification is not as simple as determining which will give you better tax treatment. In classifying your property sale the IRS will look at multiple attributes of the individual sale and your overall situation: ​ Intent: One key area the IRS will look at when classifying your property sale is your original intent in purchasing the property. If you purchase a property with the intent of fixing it up and reselling for a profit, then that property is considered dealer property. If you buy a property with the intention of fixing it up to operate as a rental property it will be considered investment property. Even if you sell the property before collecting any rent you can classify it as an investment property if you can demonstrate that your original intent was for it to be a rental property. Documenting your intent at the point of purchase is critical to defend your position before the IRS. Holding period: Generally speaking, the less time you own a property before selling it the greater the chance the IRS will classify the property as a dealer property. Frequency of property sales: If you are regularly buying and selling properties you are likely to be classified as a dealer. “Making a Living:” If a significant portion of your income is made through buying and selling properties you are more likely to be classified as a dealer. ​ These attributes are examples of what the IRS looks at to classify your property sale but not a definitive list. There is no standard formula to follow and you need to evaluate the characteristics of each property sale on its own. Understanding the distinction between a dealer and investor property can help you avoid surprises in tax season. Proper planning and record-keeping can also ensure that you receive the best tax treatment available to you when you sell your property. ​ For help determining how your property sale should be classified, please reach out to us. Previous Article

ECONOMIC RELIEF FROM THE SMALL BUSINESS ADMINISTRATION If your business is struggling, you may be able to get some help from the federal Small Business Administration (SBA), which is authorized to provide loans to small businesses on an as-needed basis. There are two types of relief you can apply for: Economic Injury Disaster Loans Traditionally, low-interest SBA Economic Injury Disaster Loans (EIDLs) have been available to small businesses following a disaster declaration; these are authorized by Section 7(a) of the Small Business Act. EIDLs are commonly granted on a local level following a natural disaster (such as a hurricane or a tornado). But right now they are authorized for small businesses in all U.S. states and territories due to the COVID-19 pandemic. Currently, each disaster loan provides up to $2 million to pay fixed debts, payroll, accounts payable, and other bills. The interest rate is fixed at 3.75 percent for small businesses and 2.75 percent for non-profits. EIDLs can be repaid over a period of up to 30 years. Additionally, due to COVID-19, the SBA is providing advances of up to $10,000 on EIDLs for businesses experiencing a temporary loss of revenue. Funds are available within three days after applying, and the loan advance does not have to be repaid. Small business owners can apply for an EIDL and advance here: https://covid19relief.sba.gov/#/ . New Paycheck Protection Program The Paycheck Protection Program (PPP) is an expansion of the existing 7(a) loan program, authorized by the recently passed Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Who’s Eligible? Employees. According to the SBA, you are eligible if your business was in operation as of February 15, 2020, and you had employees for whom you paid salaries. (The CARES Act includes as eligible payroll your payments to 1099 independent contractors, but the SBA guidance says no—you can’t include the 1099 payments. And since this is an SBA loan, the SBA guidance likely rules for now.) ​ No employees. You qualify the PPF loan even if the only worker is you. Thus, both the sole proprietor with no employees and the single-member LLC with no employees qualify. Small businesses that employ 500 or fewer employees are eligible for PPP relief. In this small business category, you find S and C corporations, sole proprietors, partnerships, certain non-profits, veterans’ organizations, and tribal businesses. ​ How Much Aid Is Available? Small businesses can borrow 250 percent of their average monthly payroll expenses during the one-year period before the loan is taken, up to $10 million. For example, if your monthly payroll average is $10,000, you can borrow $25,000 ($10,000 x 250 percent). At $1 million, you can borrow $2.5 million. The law defines “payroll costs” very broadly as Employee salaries, wages, commissions, or “similar compensation,” up to a per-worker ceiling of $100,000 per year; Cash tips or the equivalent; Payment for vacations and parental, family, medical, or sick leave; Allowance for dismissal or separation; Payment for group health benefits, including insurance premiums; Payment of any retirement benefit; or State or local tax assessed on employee compensation. What’s specifically not included in payroll costs: Annual compensation over $100,000 to any individual employee Compensation for employees who live outside the U.S. Sick leave or family leave wages for which a credit is already provided by the Families First Coronavirus Response Act (P.L. 116-127) How Much of the Loan Is Forgiven? Principal amounts used for payroll, mortgage interest, rent, and utility payments during an eight-week period (starting with the loan origination date) between February 15, 2020, and June 30, 2020, will be forgiven. If the full principal is forgiven, you are not liable for the interest accrued over that eight-week period—and, as an added bonus, the canceled amounts are not considered taxable income. Warning: Payroll Cuts Affect Loan Forgiveness Because the whole point of the PPP is to help keep workers employed at their current level of pay, the loan forgiveness amount decreases if you lay folks off or reduce their wages. 1. If you keep all your workers at their current rates of pay, you are eligible for 100 percent loan forgiveness. ​ 2. If you reduce your workforce, your loan forgiveness will be reduced by the percentage decrease in employees. Example: Last year, you had 10 workers. This year, you have eight. Your loan forgiveness will be reduced by 20 percent. You are allowed to compare your average number of full-time equivalent employees employed during the covered period (February 15, 2020, to June 30, 2020) to the number employed during your choice of 1. February 15, 2019, to June 30, 2019, or 2. January 1, 2020, to February 29, 2020. ​ 3. If you reduce by more than 25 percent (as compared to the most recent full quarter before the covered period) the pay of a worker making less than $100,000 annually, your loan forgiveness decreases by the amount in excess of 25 percent. Example: Last quarter, Jim was earning $75,000 on an annual basis. You still have Jim on the payroll but have reduced his salary to $54,750 annually. Jim’s pay has decreased by 27 percent, so the amount of your PPP loan forgiven is reduced by the excess 2 percent. The good news: If you have already laid workers off or made pay cuts, it’s not too late to set things right. If you hire back laid-off workers by June 30, 2020, or rescind pay cuts by that date, you remain eligible for full loan forgiveness. When Are Payments Due? Any non-forgiven amounts are subject to the terms negotiated by you and the lender, but the maximum terms of the loan are capped at 10 years and 4 percent interest. Also, payments are deferred for at least six months and up to one year from the loan origination date. What If You Already Applied for an EIDL for Coronavirus-Related Reasons? No problem—if you took out an EIDL on or after January 30, 2020, you can refinance the EIDL into the PPP for loan forgiveness purposes, but you can’t double-dip and use the loans for the same purposes. Any remaining EIDL funds used for reasons other than the stated reasons above are a regular (albeit low-interest) loan that needs to be repaid. How to Apply for a PPP Unlike EIDLs, which run directly through the SBA, PPP loans go through approved third-party lenders. Talk to your bank or your local SBA office (given the current demands on the SBA, your bank may be a better place to start). There’s no fee to apply, and your burden for demonstrating need is low. In addition to the appropriate documentation regarding your finances, you need only make a good-faith showing that the loan is necessary to support your ongoing business operations in the current economic climate; the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments; and you do not have a duplicate loan already pending or completed. If You’re Going to Apply, Do It Now The law allocates $349 billion for PPP relief—a huge amount, but one that will presumably be in very high demand given the devastating effects of the COVID-19 pandemic. There’s no guarantee that more funding will be forthcoming, so act now to claim your share if you are eligible. It may be a while before the processes to grant these loans are actually up and running, but get things rolling at your end ASAP. If you are in dire straits right now, you may also want to go ahead and apply for an EIDL loan and advance, as the process is already in place to apply.

5 THINGS YOU CAN DO RIGHT NOW to Help Improve Your Retirement Years When most people think about retirement planning, they focus on growing their money, but they often overlook other critical issues. Eventually you will be shifting gears to preserve what you saved over the years. Taking a few simple steps today can help equip you for the time when that shift takes place. 1. THE INCOME PLAN Build a plan so that you don't run out of money for yourself and your spouse during your lifetime. ​ While this is easier said than done, you can start by figuring out how much money you'll need to cover your living expenses. This would include fixed expenses (mortgage, rent payments, insurance premiums, etc.), variable expenses (food, clothing, car maintenance), outstanding debt (car payments, student loans, credit cards, etc.) and any predictable large purchases (a second home, a new addition, vacations, etc.). ​ Your guaranteed sources of income, such as Social Security or a pension, will be used to pay those expenses. If they aren't enough, you will need to find other income sources. 2. THE PROTECTION PLAN While the odds of your house burning down are less than 3%, most people wouldn't consider going without fire insurance for their home. ​ It's equally, if not more important to address the risk of "burning down" your income plan. For example, the chances are fairly high that you or a spouse will have some kind of long-term care need. These expenses tend to be high and tend to carry on for extended periods of time. As a result, you need to consider this risk. ​ Another risk to consider is the risk of a pension payment getting reduced. For those who plan to retire on a significant pension, this is a very real and present risk that should be addressed in your plan. 3. THE APPRECIATION PLAN Once you have addressed the income and protection needs, it's time to address how to continue growing your money. Conservative, aggressive, moderately aggressive.... You need to identify your capacity to take risk. Once you have properly identified your risk tolerance, you can then begin to focus on portfolio appreciation. ​ The reason this step is crucial is that you do not want to sell at market bottoms when your emotions get the best of you. This happens when you set your portfolio to take more risk than what your emotions can handle, and this is a recipe for disappointment. 4. THE TAX PLAN Keeping your taxes as low as possible should be front and center, and there are a variety of ways to do this. ​ One example would be to focus on asset location, as opposed to asset allocation. Asset location focuses on WHERE you choose to do your retirement saving (IRA, 401K, 403B, Roth IRA, whole life insurance, etc.), while asset allocation focuses on WHAT you choose to invest in inside the account. Asset location matters because this will have a direct impact on the tax implications when you need to access your money saved for your retirement years. 5. THE ESTATE PLAN Some estate planning may also be in order to protect yourself from taxes - particularly in states that have an estate tax, as the exemption levels are usually much lower than the federal level. ​ Taking care of loved ones in the future can also be a primary concern for many. Consult with an attorney to understand the legal documents necessary to ensure the efficiency of your estate, including a health care power of attorney, financial power of attorney, health care directives, wills and trusts. At Monotelo, we exist to make a difference with meaningful and actionable financial solutions that positively impact our client's lives. If you have questions about what steps you can be taking to prepare for your retirement years, call us at 800-961-0298

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OCTOBER 2016 MONOTELO QUARTERLY WHAT IS THE BEST Business Structure for You? assets. Once you choose a corporate structure, it is not easy to switch to another, so it is important that you weigh all your options before deciding. ​ LIMITED PARTNERSHIPS. If your business is structured as a limited partnership, then all the profits and losses of the company to distinguish between income earned as a salary, and income earned as profits of the corporation, allowing them to only pay payroll taxes on a portion of the income. The major downside to the C-corp is what is referred to as double taxation, where the profits of the company are taxed first at the corporate level, and then again at the personal level as they are passed through to the owners. ​ S-CORPORATIONS. The main benefits to operating as an S-corporation, are that income is passed through the corporation without being taxed, and you can differentiate between salary and profits of the corporation. The S-corp provides the same benefits as the C-corp, without being subject to the double taxation of the C-corp. Another benefit to the S-corp over the C-corp is when an S-corp is sold, the proceeds are treated as capital gains, which have Once you choose a corporate structure, it is not easy to switch to another When you operate a business, it is very important how you decide to initially structure that business. While a sole proprietorship is the easiest business to start and operate, not only will you miss out on tax strategies to lower what you pay the government, but you could find yourself personally responsible for the debts of the company if the company takes a turn for the worse. To avoid this risk, you can structure your business as a limited liability company, a limited partnership, or a corporation. These structures protect you from the debts of the company, hence creditors can't go after your personal will flow through to the individual returns of the owners, meaning there is no income tax at the business level. In a limited partnership, only the owners who are actively involved in the management of the business are personally liable for the debts of the company. Owners who are only financially involved in the company are not personally liable. ​ C-CORPORATIONS. This is the most common type of corporation, as there is no limit to the number of shareholders and it is easy to transfer ownership. One benefit of the C-Corporation is the ability of the managing owner LIMITED LIABILITY COMPANIES. Similar to an S-corp, an LLC provides the liability protection of a corporation, along with the pass-through nature of a partnership. An LLC, however, places no restrictions on the number of owners, the tradeoff being that all LLC members pay self-employment taxes on all income. LLC's also provide advantages upon dissolution as assets distributed to owners are not taxable until sold by the recipient. more favorable tax treatment than ordinary income, which is how proceeds from the sale of a C-corp are treated. While there are requirements to qualify as an S-corp, such as no more than 100 owners, they can provide significant tax advantages over the C-corp. July 2016 Save as PDF January 2017

TO BE AWARE OF UNDER THE 2018 TAX REFORM At the end of last year President Trump signed the Tax Cuts and Jobs Act into law, signaling the largest tax reform in over three decades. We have received a lot of questions recently on how this law will affect our clients. With the tax season now behind us it is time to address how these changes will impact you in 2018. ​ There are many aspects to this law and there is no "one size fits all" explanation for how it will impact our clients. Some of our clients will win and some of them will lose under the new law. With that in mind we have outlined the five changes that we believe are most relevant to you. Personal exemptions historically represented a $4,000 reduction in taxable income for each dependent listed on the tax return. Under the new law these exemptions have been eliminated. However, to help mitigate the loss of these exemptions, the law also made changes to the child tax credit and has added a new credit for non-child dependents. ​ Starting in 2018 the Child Tax Credit has been doubled to $2,000 per child, $1,400 of which is refundable. The phaseout threshold for the Child Tax Credit has also been drastically increased to $200,000 for single filers and $400,000 for joint filers. This means that most taxpayers who were previously prevented from claiming the full Child Tax Credit will now be able to claim the entire credit. ​ Additionally, the law has introduced a new $500 credit for any dependents who are over the age of 17, allowing parents to continue to receive a tax benefit for children in college or other adults residing in their home. SUMMARY There are many moving parts in the new tax law, with a lot of them working to balance one another out. Some of our clients will see a decrease in their tax bill while others will see it increase. Overall, we do not expect any of our clients to see drastic changes, good or bad, with the new code. We expect the majority of our clients to see an increase or decrease in their tax bill of less than $1,000. If you would like to know how the tax reform will directly impact you, please call our office. Interested in a free review of your last three tax returns? Schedule a meeting to get started! Tax Brackets The number of brackets remains at seven. And the percentage charged at each of these brackets has been reduced, with the notable exception of the lowest bracket of 10% which remains unchanged. The majority of our clients who were previously in the 15% or 25% tax bracket will now find themselves in the 12% or 22% bracket respectively. You may have already noticed the impact of these new brackets when your employer adjusted your withholdings earlier in the year, increasing your take home pay. UNREIMBURSED EMPLOYEE EXPENSES The change that could have the greatest impact on our public servant clients is the elimination of the deduction for unreimbursed employee expenses. As the law currently stands, employees will no longer be able to deduct their union dues, work uniforms, tools, or any other expenses related to their employment. The only exception to this is the special $250 allowance for teacher's expenses which remains unaffected. ​ There is currently a bill in congress which seeks to reinstate the deduction for unreimbursed expenses. The "Tax Fairness for Workers Act" would not only bring back the itemized deduction for employee expenses but would go a step further and allow for specific deductions to be taken above-the-line, meaning they would not be subject to many of the limitations that currently restrict their use. It remains to be seen how far this bill will go but we strongly recommend that you keep track of your job expenses until a decision is reached. If the bill passes, this will cause job related expenses to have a greater impact on your tax return. ITEMIZED DEDUCTIONS AND THE STANDARD DEDUCTION One of the most promoted aspects of the new tax law is the nearly doubling of the standard deduction to $12,000 for single, $18,000 for head of household, and $24,000 for joint filers. While the standard deduction amounts are receiving significant increases, many of the allowed itemized deductions are either being handicapped or removed entirely: The deductions for state and local income taxes as well as property taxes are capped at a combined total of $10,000. This means that homeowners in high income-tax states are likely to lose a portion of this former deduction. The deduction for home mortgage interest remains but is limited to mortgages that do not exceed $750,00, down from the previous threshold of $1,000,000. All miscellaneous itemized deductions (including tax preparation fees, casualty losses and all unreimbursed employee expenses) have been eliminated entirely. The increased standard deduction amounts combined with the additional restrictions on itemized deductions increases the chances of the standard deduction being more beneficial than itemizing deductions in 2018.​ 1 ABOVE THE LINE DEDUCTIONS Above-the-line deductions are more beneficial than itemized deductions as they have far fewer restrictions. The new tax law retains many of these deductions including educator expenses, student loan interest, and contributions to Health Savings Accounts. Two deductions that have been changed are expenses for a job-related move, and alimony payments. ​ Starting in 2018 expenses for a job-related move will only be deductible by active members of the military. Starting in 2019 alimony payments will no longer be deductible. However, this will only apply to divorce agreements settled after the start of 2019. This means that alimony payments from divorce agreements that were already in place prior to 2019 will continue to be deductible. FIVE CHANGES 3 PERSONAL EXEMPTIONS AND THE CHILD TAX CREDIT 2 4 5 At Monotelo, we exist to make a difference with meaningful and actionable financial solutions that positively impact our client's lives. If you have questions about what steps you can be taking to prepare for your retirement years, call us at 800-961-0298

SMALL BUSINESS TIPS PANDEMIC PROVISION FOR TAX-FREE PAYMENTS TO YOUR EMPLOYEES ​ During a federally declared disaster, such as the COVID-19 pandemic, the tax code allows you to make payments to your employees that are deductible by you, the employer, but not taxable to your employees. If your business is an S-Corporation then you qualify as an employee of the business eligible for these tax-free payments . This provision provides a great limited-time opportunity to pull money out of your business tax-free! These tax-free payments are a provision of Section 139 of the Internal Revenue Code which was passed following the September 11th terrorist attacks. ​ How Does it Work? Normally, payments of cash to your employees are considered taxable income to them by the IRS unless it is to reimburse them for qualified business expenses. Under this provision for disaster relief payments you can reimburse your employees for personal expenses that are incurred because of the disaster as long as they are reasonable and necessary. For the COVID-19 pandemic this can include: ​ Out-of-pocket medical costs not covered by health insurance Expenses for working from home such as a computer, office equipment, supplies & utilities Funeral costs for an employee or an employee’s family member Childcare costs so that your employees can continue to work while children are home from school ​ These are the most common costs that could be reimbursed, but others may qualify for the same tax-free reimbursement if they are reasonable and incurred because of the pandemic. ​ What Does not Qualify? You cannot use this provision as a substitute for your employee’s wages to provide them with tax-free income. In other words, do not reduce an employee’s wages by $1,000 and then reimburse them for a $1,000 medical expense. You can also not reimburse employees for lost wages, or as a form of unemployment compensation. ​ What Should You Do? To take advantage of these tax-free disaster relief payments to your employees we recommend that you put together a written plan for payments that identifies: ​ Starting and ending dates of the program A listing of the expenses you will pay or reimburse The maximum payment per employee A procedure for your employees to request reimbursement ​ We would advise using a form similar to an employee expense report for your employees to request their disaster relief payments. To make things a bit easier, the IRS does not require that your employees provide documentation to support the expenses claimed as long as the amounts are reasonable. ​ Summary With COVID-19 declared a federal disaster, you can take advantage of the disaster relief payment provision of the Internal Revenue Code to provide tax-free payments to your employees to cover their personal expenses that were incurred because of the pandemic. If your business is structured as an S-Corporation you as the owner are considered an employee and can reimburse your personal expenses with tax-free payments from the business. If you would like help determining what expenses are eligible for disaster relief payments or would like guidance on implementing this program for your employees please reach out to us.

THE IMPACT OF YOUR PENSION On Your Social Security Benefits Many public sector workers do not pay into Social Security because they pay into a separate state or local pension fund. Since Social Security benefits are based on the Social Security wages earned during working years, public-sector workers who do not pay into Social Security will not be eligible for Social Security benefits at retirement. ​ There are other public sector workers however, who have paid into the Social Security pool because they work second jobs or began working in the public sector later in life or retired and began a second career. Public sector workers who have paid into Social Security can qualify for benefits on top of their pension, but those benefits may be reduced based on the number of years they paid into Social Security. How Are Social Security Benefits Calculated? Social Security benefits are based on your average wages for your 35 highest earning years. If you pay into Social Security for 29 years, your benefits will be calculated using the 29 working years plus 6 years of zero wages. Your annual wages are also adjusted for inflation to prevent your early earning years from hurting your benefits. After adjusting for inflation and averaging your 35 highest years, your annual wages are divided by 12 to produce your Average Indexed Monthly Earnings (AIME). Your monthly benefits are calculated using 3 percentage brackets of your AIME: 90% of the first $926 of AIME, 32% of the next $4,657 of AIME and 15% of AIME after that. Example: If you work for 35 years and have average adjusted wages of $72,000 per year, your Social Security benefit calculation will use $6,000 for your Average Indexed Monthly Earnings and calculate your benefits as follows: $926 x 90% = $833.40 + $4,657 x 32% = $1,490.24 + $417 x 15% = $62.55_____ $6,000 = $2,386.19 monthly benefits How Your Pension May Limit Your Social Security Benefits If you receive a pension from an employer that does not withhold Social Security taxes, your benefits may be reduced by the Windfall Elimination Provision (WEP). ​ This provision reduces monthly benefits by reducing the first bracket benefits from 90% down to 40% in 5% increments depending on the number of years worked. If you paid into Social Security for at least 30 years with "substantial earnings," then the WEP limitation will not apply. But if you paid in for less than 30 years of substantial earnings the first bracket percentage will be reduced by 5% for each year under 30 until it bottoms out at 40% for 20 years of contributions. This limitation can reduce your base Social Security benefits by as much as $5,500 per year. Example: To demonstrate how this limitation reduces your benefits we have calculated the monthly benefits you would receive if your AIME was $6,000 under two scenarios: 1) where you have 30 years of substantial Social Security wages and 2) where you only have 20 years of substantial Social Security wages: The lower percentage applied to the first $926 of wages when the WEP limitation applies reduces your benefits by $463 per month or $5,556 per year. What Can You Do to Eliminate the Pension Penalty? The Equal Treatment of Public Servants Act of 2019 was recently introduced in congress to repeal the WEP limitations by replacing them with a new formula that treats public servants more favorably. With the bill’s future uncertain, we want to focus on steps you can take right now. ​ The first step in the process is to determine your Social Security benefits by creating an account at www.ssa.gov . This account will allow you to view your estimated benefits based on your prior work history. Be aware that the estimates provided by the Social Security Administration will not account for any WEP limitation that may apply to you. ​ After you find your estimated benefits you will need to subtract $46.30 per month for every year short of the 30-year window of substantial earnings. If you are more than 10 years short of the 30 year mark, only subtract amounts for the first 10 years that you are short. ​ If you are short of the 30-year threshold, you may want to consider working a few extra years at a part-time job or starting a new career at retirement. These additional years of contributions will not only increase your potential Social Security benefit, they will also decrease the limitation put on those benefits by the Windfall Elimination Provision. What Constitutes "Substantial Earnings" Substantial Earnings are a separate calculation from the calculation of year paid into Social Security. To qualify for a year’s worth of Social Security earnings, you only need to earn $5,880 of wages. To qualify for substantial earnings, you need a total of 26,550 of wages subject to Social Security. The table below will show the substantial earnings test. To discuss this further, please reach out to one of our team members at (847) 923-9015. Save as PDF Read More Articles Failing to order your affairs to minimize your tax burden could cost you significant money - so don't wait to take action. If you have additional questions or need some planning help, please reach out to us.